Apple experienced a surge in its stock price following Tim Cook’s announcement of the largest stock buyback in stock market history. However, this positive reaction cannot overshadow the fact that Apple’s revenue declined by 4% year-over-year, with iPhone revenue specifically dropping by 10%. While stock buybacks typically lead to an increase in stock prices, the lack of significant innovation and revenue growth may lead to a short-lived post-earnings rally, potentially resulting in profit-taking in the near future.
Despite the overall market optimism, Apple’s stock price is displaying weakness, characterized by lower highs, lower lows, and a downward-curving Relative Strength Index, indicating a diminishing upward momentum. In light of this, a short-term bearish trade might be considered to capitalize on the current situation. One potential strategy could involve setting up a bear put spread on AAPL.
At its current trading price of $483, one approach could be to set up a bear put spread by purchasing an in-the-money $485 put and simultaneously selling an out-of-the-money $480 put. This combination creates a vertical spread that forms the basis of the trading strategy. If AAPL drops to $480 or below by the expiration date, this trade has the potential to double the initial investment, offering a 100% return on investment.
To maintain a positive expectancy in trading, it is crucial to ensure that winning trades outweigh losing ones. In the event that AAPL moves against the trade, a rule of thumb could be to close the position if 50% of the investment is lost (i.e., $125 in this case). By adhering to this risk management strategy, each winning trade can help offset the losses from two unsuccessful trades, ultimately aiming to optimize gains and minimize losses effectively.
While Apple’s stock buyback announcement initially led to a surge in stock price, underlying revenue challenges and potential lack of innovation may impact the sustainability of this rally. A short-term bearish trade through a bear put spread could be a strategic approach to potentially capitalize on the current market conditions. By implementing sound risk management practices and closely monitoring the trade, investors can seek to navigate the volatility and maximize potential returns in the stock market.